Obama housing fix too timid?

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A key participant in the country’s debate over housing policy is blasting the Obama administration’s plan to fix the mortgage mess as “much too timid” but says he’s adamantly opposed to mortgage “cram-downs” in Bankruptcy Court.

Since last fall, real estate guru Chris Mayer, senior vice dean at Columbia University’s business school, has argued that the Treasury Department should refinance “the entire universe” of loans guaranteed by Freddie Mac and Fannie Mae -- nearly half of all residential mortgages -- at an interest rate below 5%. He also wants to give loan servicers -- the bill collectors for mortgage investors -– legal protection to aggressively modify home loans without being sued.

But Mayer told L.A. Times reporters and editors today that a proposal to allow bankruptcy judges to reduce the principal on first mortgages, as they already can on other types of debt, would tempt homeowners to reject solid offers by lenders and servicers to modify loans, hoping to get a better deal in court. The option to seek the imposition of a principal reduction, known as a cram-down, might trigger a wave of bankruptcy filings, overwhelming the country’s bankruptcy judges, who number fewer than 400, he said.

And allowing judges to cram down mortgage balances would surely force lenders to raise mortgage rates, Mayer said.

“I don’t think that raising the cost of credit in a recession and during a credit crunch is good policy,” he said. Mayer also argued that principal reductions aren’t needed — because, he said, even “underwater” homeowners won’t walk away from their mortgages as long as they can afford their monthly payments.

A congressional vote on a mortgage cram-down measure was postponed this week by House Speaker Nancy Pelosi after industry groups including the Mortgage Bankers Assn. and the American Bankers Assn. objected and some lawmakers withdrew their support. A Pelosi spokesman said the House would probably consider the bill Tuesday or Wednesday.

--E. Scott Reckard